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YNAB Version 4

Updated December 10, 2008

Copyright © 2004-2007 You Need A Budget, Inc.

Table of Contents............................................................................................................Introduction 4

..........Quickstart: The Page to Read if you Don’t Want to Read the Entire Guide 5.............................................................................................Some Terms Defined 6

................................................................................................................Budget 6

................................................................................................................Inflows 6.............................................................................................................Outflows 7

...............................................................................Credit Card Transactions 7............................................Reimbursable Expenses, Returns and Rebates 8

.................................................................................................Available Money 9.........................................................................................................Categories 9

............................................................................................Savings Categories 9......................................................................................................Retirement 9

............................................................................................Everything Else 10...............................................................................The Flow of Money in YNAB 11

...........................................................The Rules of Healthy, Intuitive Cash Flow 12.................................................Rule One: Stop Living Paycheck to Paycheck 12

...................................................................................How Rule One Works 12.................................................................Variable Income Under Rule One 12

........................................Advantages of Operating with Rule One in Place 12...................................................................How do I Implement Rule One? 13..................................................................Rule Two: Give Every Dollar a Job 15

...............................................The Wisdom of Bossing Your Money Around 15................................When Your “Employees” Force You to Face the Music 16

.........................................................................The Mechanics of Rule Two 17...............................................................................Budgeting and Marriage 18

....................................................................The “Flexibility” of Your Budget 18..................................................................Rule Three: Save for a Rainy Day 18

................................................................................How Rule Three Works 19.............................................................Examples of Rainy Day Fund Uses 19

....................................................Rainy Day Funds that are only Estimable 19..............................................Starting YNAB with Bills Due (or due shortly) 20

...............................................................................Rule Three in a Nutshell 20............................................................Rule Four: Just Roll with the Punches 20

.....................................................The Advantages of Living with Rule Four 20..........................................................................A Summary of the Four Rules 21

......................................................................................................Rule One 21......................................................................................................Rule Two 21

....................................................................................................Rule Three 21.....................................................................................................Rule Four 22

.................................................Why YNAB and “Traditional” Software Don’t Mix 22....................Why Balancing Your Checkbook may be a Royal Waste of Time 22

.................................................................Traditional Checkbook Balancing 22

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......................................How the Rules Ensure Your (Overdraft) Protection 23...............If I Don’t Need to Balance a Checkbook, What Do I Need to Do? 23

...................................................................................................FAQ: General 24..............Is it counterproductive to go back and adjust budgeted amounts? 24

.........................How do you handle Flexible Spending Accounts in YNAB? 24.............I'm paid on the last day of the month. Do I already have a buffer? 25

.................Wouldn't the buffer be put to better use paying off credit cards? 25.......................................What do I do with the occasional third paycheck? 26.......................................How can I check what I should have in the bank? 26

...............What can you suggest for those of us that work on commission? 26........................................................Can I use cash envelopes with YNAB? 26

..........................................Where do you physically keep rainy day funds? 27...................................How do I record cash taken from my bank account? 27

...........................................................................................................Conclusion 27...................................................................................................................YNAB 27

.........................................................................................General Information 27.......................................................................................Changing Formatting 28

....................................................................................................The Register 28......................................................................................................The Budget 28

..........................................................................................................Overview 29....................................................................................................Categories 29

........................................................................................Income Statement 29..........................................................................................................Budget 29

.................................................................Using YNAB for the Following Year 29.....................................................................................................FAQ: YNAB 30

......................................How can I keep track of notes to myself in YNAB? 30....................................................How do I get rid of the yellow text boxes? 31

................................................................Can I add other sheets to YNAB? 31....................................Why have some of the Register lines disappeared? 31

.................................I’m seeing “#####” instead of the value in cell. Why? 31

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IntroductionWelcome to YNAB! I’m excited that you’ll be using this system and hope that this setup guide will explain what you need to know to effectively manage your money.

When I released YNAB Pro in November of 2006, I emailed all of my existing YNAB customers to let them know about it. I was surprised at the number of responses I received from people who had purchased YNAB, but never put it into practice.

If I want to sell hundreds of thousands of people on the idea of living within their means, and getting out of debt with an extremely easy-to-use money management system, I need the people who buy it, to actually use it. If they use it, they’ll tell their friends about it. This guide is my effort to convey exactly how to use the YNAB system to your benefit.

There you have it, my top-secret hobby-turned-business strategy.

If you haven’t already been through the 10-day Budgeting Boot Camp eCourse, I highly recommend it. While the Boot Camp and this Guide may overlap a bit (I mean really, how much can you say when it comes to budgeting…), I’m confident you will benefit from both.

Note: Many people may dive right into the software and don’t read too much in the Guide. That’s fine with me, but I urge you to consult the Guide before you consult me directly – for my sanity, and because you’ll get your answer much quicker. As the popularity of YNAB grows, my ability to answer every email is declining. To that end, I’ve setup the frequently asked questions area of the site, along with an extremely helpful forum where other YNAB users can answer each other’s questions. I’m quite active on the forums, so odds are, I’ll chime in there anyway!

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Quickstart: The Page to Read if you Don’t Want to Read the Entire Guide

List account balances Record in YNAB Create Categories. Budget

Checking AccountsName Balance

Make sure to exclude any outstanding checks, and include deposits in transit.

Record each balance as a Supplemental inflow in the Register

All of these supplemental inflows will show in the Available number at the top of your first month.

Setup your categories how you would like, and allocate all of the money wherever it needs to go (rent, utilities, etc.)

Savings Accounts (see this section for more detail)

Name BalanceMake sure to exclude any outstanding checks, and include deposits in transit.

Record each balance as a Supplemental inflow in the Register

Now all of these supplemental inflows will show in the Available number at the top of the month.

Setup categories for each of your savings accounts.

Enter the savings account balance in the Budgeted column for each category.

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Some Terms DefinedThe terms I’ll use in the guide are fairly common, however, I’m including this section to clear up any confusion and make sure that we all start on the same page.

BudgetThis is the place where the rubber truly meets the road. You will spend a half hour to an hour each month planning what your money will do for you. You’ll spend the other 719 hours of the month carrying out that plan. Take it seriously. Hang it on the fridge. Keep it close to your heart —and even closer to your wallet.

A budget is not restrictive. It’s a tactical battle plan. It’s a roadmap. It’s structure. It’s control (of your money, not your spouse). It is the foundation of all other financial happenings of your life. It deserves more attention by financial gurus but it doesn’t get it because it doesn’t sell as well.

Actively budgeting will enable you to reach your financial goals.

InflowsIn YNAB there are three main types of inflows, and one special fourth case:

1 Primary (delayed one month, per Rule One) can be employment, self-employment, social security, dividend payments, rental income, etc. Until you’re living under Rule One, you won’t use this, but once you are, it’s basically whatever your primary source of income is. It’s the after-tax amount received from any of the above-named sources. You decide what is “Primary” for you.

2 Supplemental (no delay) is any other money you receive. Did you sell something on eBay? That’s supplemental. Did your Grandma give you $5 for mowing the lawn? That’s supplemental as well.

3 Category-specific inflows happen less-often but are definitely worth mentioning. If you purchase a new cell phone for $150, but have a rebate coming for $125, you would record the initial cash outflow in the Phone category of $150 to show the purchase of the phone and the actual cash leaving your pocket. Once you received the rebate, you would record an inflow in the Phone category of $125. This then represents your true Phone expense of $25, neither overstating income (treating the rebate as such) or expenses (treating the entire $150 as the cost of the phone). I discuss this in more detail here.

Make sure you record every inflow. Every dollar that lands in your hand or your checking account, must be entered. You want your dollars working hard for you and doing what you want them to do. Make every one of them work!

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OutflowsAn outflow takes place every time money flows out of your life. Is recording that a hassle? It depends on how you think about it. Is it a hassle to be broke? Yes. Then writing down everything you spend and not being broke seems like a pretty good alternative to me. There is no better way to manage your spending than to write down everything you spend. A few tips:

1 If you use cash for a transaction, pocket the receipt. At night, when you’re getting ready to hit the sack, take the receipt and stick it in an envelope that you have on the nightstand or some other convenient place.

2 If you use a debit card or have something electronically paid, it’s already stored for you online at your bank. I usually don’t worry about those receipts (unless the receipt requires splitting, Wal-mart comes to mind).

3 Once a week or so, sit down with the envelope, log on to your bank, and enter what you’ve spent. This process (all three steps) takes about 10 minutes per week. That’s 1/3 of a sitcom (including commercials). No more whining.

4 I’ve noticed that if you wait longer than a week, the chance of forgetting to record a transaction is much higher. If you’re just beginning, you should consider doing this every night for at least a month – just to ensure that the habit is formed. It will pay for itself because you’ll end up choosing not to purchase things just so you won’t have to record the transactions. This increase in consumer awareness and the resulting reduction in your spending habits is just one of the myriad of financial benefits YNAB will bring to your life.

Credit Card TransactionsWe run into a bit of a problem when we start considering the responsible use of a credit card and the possibility of irresponsible credit card use in the past. Remember these things:

1 Once you begin using YNAB, all credit card purchases are recorded as outflows at the time of purchase. Granted, the timing of the actual outflow is lost (when you pay the balance), but there’s wisdom in this method: You don’t need to worry about moving money to a special “paid with a credit card” category. There’s no use for one. Treat the purchase as an outflow at the time of the transaction.

2 This means that you would not record the payment of your credit card balance as an outflow (if you did, you’d be double-counting it, which would give you an inaccurate representation of your spending).

3 What about past balances from your pre-YNAB days? Make a separate category for debt reduction and throw as much money as you can toward that category to get those balances paid down.

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In summary, new credit card transactions will be recorded as an outflow at the time of purchase; the payments on old balances will be recorded as an outflow to some type of debt reduction category.

I highly recommend that you stop using your credit card entirely if you are carrying any sort of balance month to month.

The terms “inflow” and “outflow” were chosen over terms like “income” and “expense” because I wanted to emphasize the fact that YNAB works with your finances in a much broader, all-inclusive sort of way. It achieves the highest level of money management, in that you account for every inflow and every outflow – yet it also operates in the minutiae as well, when you’re down in the trenches deciding whether you need to budget an additional $3 in the toiletries category for the extra-special toothpaste (you say you won’t be like that, but you will). It provides ultimate accountability for your dollars.

Reimbursable Expenses, Returns and RebatesIf you, or your spouse, are anything like my wife, then you return 50 percent of what you purchase. I’m exaggerating. It’s probably 40 percent.

The easiest way to handle reimbursements is to simply record an inflow for the refund amount in that category.

ReturnsExample: My wife purchases a pair of jeans. After three hours of scrutiny at home, she decides they look different than they did at the store. A few days later she takes them back. In this instance, the entire purchase is negated. One would think that you could just delete the original outflow; I wouldn’t recommend that. When checking the bank to make sure you’ve included everything in YNAB, you may get a bit confused when the bank indicates a purchase, but YNAB has no record of the transaction for the jeans. It’s much easier to simply show the two transactions separately and let them net each other out: The outflow for the purchase of the jeans, and the inflow for the return of those same jeans.

Reimbursements and RebatesExample: You’re reimbursed 90% for doctor’s visits. The visit cost $100, so you record the entire outflow of $100. A few weeks (maybe even a month) later, you’re reimbursed $90 for the visit. It’s important that you (1) don’t wait to show the “actual” outflow of $90 until the reimbursement, because of the possible lag, and (2) don’t overstate your expenses and income by recording the $90 reimbursement as income later.

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Your true expense of $10 ($100-$90) is correctly stated by recording the initial “Doctor” outflow of $100, then recording a “Doctor” inflow of $90 when it is received.

Available MoneyThis number is the crux of YNAB. We’ll delve into the rules later, but since we’ve already talked about inflows and outflows, we should definitely talk about how YNAB calculates what you have Available to Spend:

Primary Income from the Last Month (Rule One)+ Supplemental Income from the Current Month- Overdrafts from the Last Month (Rule Four)- Budget amounts from the Current Month (Rule Two)

**Note: Keep in mind that if you budget a negative number (-), it will be added back to your Available money. You could then take that newly added money and budget it into a different category. Using negative budget numbers (to the extent there’s a category balance to draw from) lets you easily move money between categories.

You’ll see a visual representation of the Available number when we talk about the overall flow of money in YNAB.

CategoriesYour budget will be broken down into categories. In the good ol’ days, these would have been the envelopes of the envelope-budgeting system. Conceptually, there are two types of categories: categories that represent money you spend, and categories that represent money you’re saving. Per Rule Two, you’re going to allocate all of your available money to categories for spending or saving.

Savings CategoriesKeeping in mind that YNAB is a cash flow system, let’s briefly talk about savings categories. There are basically two types: retirement, and everything else. First, we’ll talk about retirement.

RetirementThe trick with retirement is to recognize that money you’re putting into your Roth, 401k, IRA, SEP-IRA, Keogh, 403b…is an outflow. You’re spending cash to purchase shares in mutual funds, bonds, stocks, etc. Record it as such.

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Everything ElseUnder “Everything Else” you may consider an emergency fund, car savings, house downpayment, etc. These things are all non-retirement. You’ll budget to these categories, but will rarely record an outflow from these accounts.

Let’s say you have a savings category called Emergency Fund (EF), and you have an emergency. Your car’s transmission has gone out and you need $1000 to spend in the Car Repairs category. YNAB shows a balance of $5,000 in the EF category, and your actual savings account shows $5,000 (plus interest, most likely). To move money between categories, you simply redistribute what you have Budgeted between those two categories. If that $5,000 was budgeted in many months prior, you would record a negative amount in the EF category’s “Budgeted” cell. You would literally enter -$1000. That would kick the $1,000 back to the Available number. You could then enter $1,000 in Car Repairs, bringing the Available number back to zero.

There are a few caveats with these accounts. The first is that your savings account balances will most likely accrue interest—especially if you keep them in a high-interest online bank such as ING. An easy way to handle this is to record a supplemental inflow every few months to record the interest accrued. You would immediately allocate that money from what you had Available to the savings category that had earned the interest.

Summary:• You rarely record an outflow from a savings category,• Movement of money from account to account is handled by altering

Budgeted amounts, including budgeting negative numbers if part of the balance to be moved was budgeted in prior months,

• Interest earned on savings accounts is entered as supplemental income on a periodic basis and allocated to the savings account that earned the interest.

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The Flow of Money in YNABWhen you understand this diagram, you’re 90% there. Remember, the software does all of this for you. You just need to record the inflows, budget your Available money, and record the outflows.

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Rule Three

Rule TwoPositive balances roll forward

BalanceInflows Timing Budgeted OutflowsAvailable

SpentCategory

PrimaryNext Month SpentCategory Positive

Primary+Supplemental

SpentNowSupplemental Category

SpentCategoryOR

Less: Last Month’s Negative Balances InvestedCategory Negative

Category balance is zeroed…

Rule Four

Rule One

The Rules of Healthy, Intuitive Cash FlowI know I talk a lot about the Rules on the site, but I’m going to do it here as well. Occasionally someone will email me and ask me why this or that, and the reason will be because one of the Rules enforces it. My aim is to explain these Rules, why they’re there, and how you implement them, so there won’t be any more confusion.

Rule One: Stop Living Paycheck to PaycheckYou don’t need to be following this rule to be able to use YNAB, but, I want you working toward it.

Perhaps I should re-word Rule One: Live on Last Month’s Income this month.That’s basically all there is to it. It’s extremely straight-forward, but fairly difficult in its implementation.

How Rule One WorksIn YNAB, when you record a Primary inflow, it’s going to be Available to budget in the next month. That’s the rule.

Variable Income Under Rule OneRule One is there because it makes budgeting much, much easier. If you’re on variable income, you’re normally advised to prioritize our income. When there are low months, items at the end of the list of priorities may not get any money. During the high months, everything gets some money and you have a lot more wiggle room.

The whole prioritization concept goes out the window when you’re living on last month’s income. You’ll know how much to budget for February because January and its earnings have come and made themselves known. “Honey, in January I made $3,231.57. That’s how much we have to budget for February.”

Plain and simple.

My income isn’t variable anymore (it used to be variable, which is why Rule One came about in the first place when I was constructing YNAB). Like many others, I work on salary. I know, to the penny, how much I’m going to earn in a given month. However, there are other reasons that should be good enough for anyone to want to be living under Rule One.

Advantages of Operating with Rule One in PlaceSo why worry about Rule One even on a fixed income?

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It creates a healthy buffer. Breathing room. That’s why I call it “The Buffer”. It buffers you from the abnormalities and unexpected expenses of life. Not only does it make budgeting easier, it makes, well, everything easier.

A few examples, off the top of my head, of why I’m grateful to be living with a buffer:

I don’t worry so much about which paycheck is going to cover which expenses. With normal money management processes in place, lots of time is spent trying to figure out how to time payments according to paydays. The logic looks something like this: “The first paycheck will go toward the mortgage and utilities, we’ll eat Ramen for two weeks, then the second paycheck will come in and we can eat and buy that toothpaste we’ve needed.” I say that a little facetiously, but there’s truth to it. When you’re living on last month’s income, you just pay things when they are due because you’ve already earned the money that’s being spent.

As I’m spending money in the current month, I’m also making money for the next month. The checking balance is always somewhere in the range of “healthy” and “flush with cash.” This is all relative, of course, but we don’t operate with a checking account balance anywhere near the zero-dollar mark. It’s not that we aim to have a huge balance in there, it just happens because we’re earning next month’s money as we’re spending this month’s. Imagine it: you earn a paycheck, and your money just sits for as long as 30 days!

We can budget in monthly intervals, instead of weekly, or every paycheck. Many financial advisors suggest that budgeting annually doesn’t reinforce goals often enough, while budgeting too often doesn’t add any value to the process. Nearly every advisor suggests budgeting monthly. You reinforce your annual goals (you really should have some) with monthly adjustments, but you aren’t doing it so often that it becomes inefficient.

Every once in a while, we get nailed with an emergency (i.e. our car is totaled). The Buffer allows us up to a month to figure out how we’re going to handle things. Should we take some money from our emergency fund? Should we try to earn some extra money? Should we readjust the budget and funnel some money into the now-needy Car Replacement category? In the financial world, the more time you have to make a choice, the more valuable that choice becomes. There’s wisdom in that. When you’re not operating on the edge, you have time. Time lends itself to wiser decisions.

Those are a few examples. Strive to live under Rule One!

How do I Implement Rule One?Implementation of Rule One is not as tough as people tend to think. In one sentence:

Make it through the month without touching your paycheck(s)

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It’s easier said than done, of course.

Let’s walk through the steps:

1 Until you’re living under Rule One, enter all of your inflows as Supplemental. This will make the money available now, verses entering Primary income that is available in the next month.

2 There is a default category called Buffer. I encourage you to put some of your inflows toward your Buffer category and not do anything else with it. Just let the balances accumulate from month to month.

3 Let’s say you spend an average of $3,000 per month (let’s ignore, for now, the fact that YNAB will help you shave about 15-20% off that). Let’s also say that the maximum you can afford to put toward your buffer each month is 10%. So every month, you record two paychecks of $1,500 (net) each, and you budget $300, ($1,500 * 2 * 10%), into your Buffer category. At the end of 10 months, assuming no other significant changes, you would have a $3,000 balance in your Buffer category.

4 With one month’s expenses (your buffer) in your checking account at the beginning of a new month you’re ready to stop living paycheck to paycheck. You would then take that $3,000 out of the Buffer category by entering a negative $3,000 in the budgeted cell for that month (exactly like you would do as discussed here). Doing this would move that $3,000 back into the Available amount for the month. You could then allocate it to your normal living categories. The Buffer category would go to zero, your other categories would increase, and you’d go the entire month without touching your paycheck. (You can skip Step 5)

5 If you already have savings that you can use for your buffer, you’ll want to:

• Physically move the money to your checking account,• Record a Supplemental inflow of the buffer amount,• Budget the now available money into your spending categories, and• Make it through the month without touching a paycheck.

The trick is to make it through the month! You can attack the issue from two different angles: 1) increase your income or 2) decrease your expenses drastically, and allocate as much of the extra amounts toward your buffer.

You don’t need to have $3,000 saved if that’s your normal expenses for a month. You may decide you want to get there much faster and go crazy on expense cutting for a short period. Remember: you want to make it through the month

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without touching your paycheck – even if you just barely make it. And even if you do some things that you could never do over the long haul (like eat leftover macaroni five nights in a row).

If it were Julie and I doing this for the first time, I would cut out every unnecessary expense for that month: no eating out, no entertainment, no gifts, no get-togethers, no fancy (or even pretty standard) grocery items. No driving unnecessarily. Get the picture? You just make a temporary amputation of all of your expenses, barely eek by for the month, and then you’re good to go with a month’s worth of paychecks to budget.

The difference this will make in your finances, to no longer belong to the 75% of households who live paycheck to paycheck, is not to be underestimated.

YOU CAN DO ITRule Two: Give Every Dollar a JobAs you saw in the flow of your money, your inflows make up what you have Available to budget each month (less what you overspent last month, which we’ll talk about later).

Rule Two demands that you operate using a zero-based budget. This basically means that every dollar you have Available needs to be assigned a job.

The Wisdom of Bossing Your Money AroundImagine a business where there are no defined job descriptions. Everyone just kind of comes and goes as they please. Some days you might find an engineer working on a marketing plan. The next day he could be over in finance figuring out how to account for a lease. The marketing employees love spending time on the factory floor because of all the big, shiny machinery. The accountants (with all their charisma) enjoy spending their time trying to sell the product to customers (imagine how well that's going). Occasionally you might find a purchasing agent in discussion with the product design team about a cheaper, stronger material he read about on the internet...

I think you get the picture. This is not a company that has mastered cross-functional team theory. This is a company that lacks defined employee responsibilities. You wouldn't want to work there - and your job wouldn't last long if you did. It is only a matter of time before a company without properly defined roles is going under.

A household, where the dollars' roles are not properly defined will eventually go under as well.

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In the past, devout budgeters would use envelopes to assign jobs to their dollars. The system was pretty straight-forward; the dollar, sitting in the "groceries" envelope, knew exactly what to do, and when to do it.

In our much-more-modernized society (that has ironically not improved so much on the budgeting front); most people don’t manage well with a lot of cash. I personally have tried the envelope system, with a few select spending categories, (groceries was the big one,) and failed miserably. I would forget the envelope. Have I ever forgotten my debit or credit card? Not one time.

But does that mean our dollars can just roam about doing whatever they please?

Not even a little bit.

With spending apparently easier now than in the past (broader access to credit), it has become even more important that we consciously assign each dollar that comes into our hands a job to do for the month.

For instance, let's say that $2,000 comes into your hands during the month. You must take every single dollar and assign it a job. Some dollars will go to rent, and do their job during that very month. Other dollars will go to savings, where their job is to recruit new employees (a.k.a interest) and train them to do the same. Some dollars have the job of just being "ready" for an emergency (much like firemen, right?). You'll have some dollars that sit around for six to twelve months before finally doing something (car insurance premiums, and Christmas funds come to mind). Every dollar still does something. No dollar goes without a job.

When Your “Employees” Force You to Face the MusicThere have been numerous occasions where things have been tight for us financially. To be honest, one of those “tight spots” is what triggered the idea to make a budget in the first place (the tight spot was an upcoming marriage). The other moment of facing the music gave me the initiative to try and sell YNAB (that tight spot was the fact that our first child was on the way and I had two years of school left—but we wanted Julie to be able to be a full-time mom).

When you’re operating under Rule Two, operating zero-based, where every dollar has a job, there may be, there most likely will be, times when you realize that you don’t have enough money. It usually happens when you’re happily allocating your dollars to their categories, the Available number is decreasing as it should, everything’s going great until you look up and see that your Available number is ($153.54). Now you’re facing the music!

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Your budget just threw itself back in your face. Welcome back from La La Land. You have two choices: 1) spend less, or 2) go sell something on eBay – quickly.

Before you throw your financial calculator at your monitor, let me remind you that it’s not the budget’s fault! You’re the one trying to spend money you don’t have!

Although there is a humorous tone to all of this, the reality is that this is reality. There’s the rub of the zero-based budget. If you don’t have the money Available, it won’t let you budget it. Well, I guess you could “budget” as much as you wanted, but you’d run a huge Available number deficit, and wouldn’t be able to sleep at night.

Going back to the first part of this section, facing the music isn’t a bad thing – at all. It forces you to face reality. It forces you to get creative. Maybe it’ll force you to ask for a raise, take up a second job, sell some things to pay off credit card debt (the saddest part of the music is the part about minimum payments on credit cards), or even start a small business. That was what it did for me and I am so glad it did.

When I faced the music three months before our first baby boy was born, I didn’t feel happy. I didn’t feel confident. I felt scared. I was scared because I had a lot of school ahead of me, and a very small amount of money coming in to pay for it. I did, however, feel a drive to provide for my family just enough that Julie could stay home and be a mom.

Some people say music is an inspiration, and in that moment, I believe facing the music was, quite literally, inspiration.

Do not run away from reality. Confront it. Ponder over your dilemma. Open up your mind to new ways to cut your costs and increase your income. Inspiration will come.

The Mechanics of Rule TwoThis probably doesn’t even need its own section but I’m going to try to be as comprehensive as possible.

At the beginning of the month, the Available number (at the top of the Budget) will be a positive number. The composite of all recorded inflows will be represented in the “Available” amount.

The budgeting (assigning, allocating, etc.) process is simply entering an amount into the Budgeted column for each of the categories that will need money during the month. Every time you enter an amount, the Available number decreases. When your Available number drops to zero, you’re operating on a zero-based budget. Every dollar you have at your disposal has been assigned a job.

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Your Available number should never drop below zero. That means you’re budgeting money that you don’t have.

If you want to leave yourself some “cushion,” I suppose that’s okay, but I’d rather see it allocated to a category called “cushion” (not to be confused with finding money under sofa cushions, though the parallel is striking).

Budgeting and MarriageI won’t dive into this topic completely, but I would like to point out that this monthly budgeting part of YNAB, should, if possible, be done with your spouse. I don’t mean next to you watching TV while you budget, I mean next to you, engaged in the process. The budget is only as strong and effective as the commitment from each spouse to live by it.

This is something I talk about at length in the e-course, but you’ll want to make sure that you each have a bit of your own money, in your own category, that can be spent on whatever the heck you want with no justification or explanation. This personal money is vital if you want any longevity in your use of YNAB as a couple.

The “Flexibility” of Your BudgetThere are two schools of thought on whether you should be allowed to adjust budgeted amounts once you’ve done the spit shake with your spouse (or yourself, that’s weird though), and have committed to your budget.One side says that you absolutely should not change what you budgeted once the month begins. The reasoning behind this idea is the fact that what you budgeted (i.e., what you thought you would need) at the beginning of the month is a valuable piece of information and if you change budget amounts throughout the month, you lose that valuable data.

The other side says that you can and may change what you budgeted once the month begins. I fall on this side.

If you budgeted $50 into a Miscellaneous category and discover halfway through the month that you’re going to need $30 more in the Groceries category, then make the adjustment! Steer your money clear of accidents where you can.

Rule Three: Save for a Rainy DayRule Three is certainly the most straight-forward of all the rules. It will smooth out those peaks and valleys (metaphorically speaking) you may have been experiencing in your financial life.

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How Rule Three WorksAs you may have noticed in the diagram of the flow of your money in YNAB, the far-right column is the Balance column. At the end of a month, a balance can be either positive, zero, or negative. Zero balances obviously don’t matter, so we’ll just ignore those. We’ll talk about negative balances when we get to Rule Four, and we’ll talk about positive balances right now.

One feature that is lacking in many mainstream personal finance packages is the ability to have balances roll forward from one month to the next. I don’t know why they don’t have this feature; YNAB does.

Consider this example: You budget $200 in groceries for the first month. Things went well, there were some bargains, and you spent $180. The $20 balance will automatically be added to next month’s balance. So if you budget $200 next month, your beginning balance will be $220.

Consider another example: Your $360 car insurance premium is due every six months. Instead of being knocked off your feet every sixth month, where you need to scrape enough money together to pay the bill (this usually ends up being charged to the credit card), you could approach it under the watchful eye of Rule Three. You would budget $60 per month in the Car Insurance category. At the sixth month, your balance would show $360, you’d cut the check, and move on without a worry.

Examples of Rainy Day Fund UsesHere is a non-comprehensive list of bills/events that could be considered Rainy Days:

• Car Insurance• Car Repairs• Property Taxes• Christmas• Vacation• Home Repairs• Magazine Subscriptions• Annual Organization Dues• Tuition• Car Replacement (saving for a car, instead of borrowing for one)

Rainy Day Funds that are only EstimableYou’ll notice that some of these listed, such as car and home repairs, do not come in the form of a bill that can be predicted. You pay for car repairs when something breaks, and you don’t know when it will break or how much the repair will cost. However, you do know that something will break eventually. As you budget more and more, these costs will become oh-so-predictable. I can tell you

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right now that when we had just one car, we spent about $55 per month on various car repairs and maintenance. An A/C condenser here, an oil change there…throwing a bit of money toward the car repairs every month “just in case” does a lot for one’s sanity.

Starting YNAB with Bills Due (or due shortly)Perhaps you’ve just purchased YNAB and, in setting things up, you realize that your large car insurance bill, or Christmas, or property taxes, or vacation expenses are due soon. Since you haven’t been living by Rule Three up until now…you’ll still need to budget accordingly. If your $360 car insurance bill is due in two months, you’ll need to budget $180 in month one, and $180 again in month two.

Rule Three in a NutshellWhat you’re going to do is anticipate large expenses, both fixed and variable, regardless of how estimable they are. My advice would be to take a stab at it and just start.

YNAB will roll those excess balances forward until the due date (which will hardly feel like a due date at all, since you’ve been “paying” for it every month).

Following Rule Three is like driving on a smooth stretch of open highway in a luxury sedan. It makes a long trip manageable – even enjoyable.

Rule Four: Just Roll with the PunchesThe gist of Rule Four: when a category is overspent in month one, the category is zeroed and the overspent amount is deducted from Month two’s Available money.

As you can see in the flow of money diagram, all balances are analyzed at the end of the month. If the balance is positive, it rolls forward to the next month (Rule Three). If the balance is negative, it does not roll forward. Keep in mind that this whole process is automatically done for you each month. Get your head around it here, then just go with the flow after that. (YNAB Pro has tooltips to help you understand exactly what’s happening as well).

The Advantages of Living with Rule FourOnly after living under Rule Four for a while (it wasn’t a “rule” back then, just something I had built in to our spreadsheet because of the problem mentioned above), did I realize how much potential it had.

Conservatism is a very fitting word for Rule Four. You’re addressing mistakes you made in the prior month before moving on to the next month. You’re forced to address them and find a solution. It’s just a gentle nudge (or rough push when

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necessary) from YNAB telling you to be heads-up, keep your game face on, and do something about it.

You can’t ignore Rule Four forever. We overspent by a large amount on unanticipated plane tickets. Our vacation category went over by $400. (Remember that the $400 was deducted from what we had Available to spend the next month.) $400 is a big hit to a pretty tight budget and to try and work the month without the money we normally had was near impossible. We gained some ground though and ended up only having total overages that next month of $200. That was still a lot of money to do without for the month, but we worked hard at allocating money where it truly needed to go, and ended up overspending in categories by only $22. The next month, we didn’t notice that missing $22. The point is that we had to address the overage or we never would have made up for it.

A lot of times that is what will happen with you. You’ll overspend a bit here and there, but you won’t notice. That’s why I call it “rolling with the punches”. You’re taking the hits as they come, staying on your feet, and staying in the fight to live within your means.

A Summary of the Four RulesYou have purchased some very useful software. It looks good, it is a quality product, and you will get a lot of satisfaction from using it. But my ultimate desire is that you appreciate the rules that the software enforces. The rules are the key. The rules are what will make your money management enjoyable. The rules will cut down on the time you worry about your money. When followed, the rules will take care of you.

Rule OneSimply make it one month without touching that month’s paychecks (easier said than done, I know). For the exact steps on implementing Rule One, revisit this section.

Rule TwoYour Available number, after budgeting, should be exactly zero. You’ll be operating in a state of maximum-dollar-utilization. This is a zero-based budget at its finest.

Rule ThreePrepare for rain. Save for and anticipate larger expenses, both fixed (car insurance) and variable (car repairs). YNAB will accumulate those balances over time so that when the expense comes, you’re ready for it.

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Rule FourCategories that were overspent in month one, will have the amount of the overage deducted from month two’s Available money. The overspent categories can essentially be “paid back” and brought to zero.

Why YNAB and “Traditional” Software Don’t MixYNAB may not be what people initially expect. When they think of a money management piece of software, they probably think about bank balances, checking and saving accounts, and reconciliations.

YNAB doesn’t really care about any of that. Which is why I can put “in half the time” at the end of “Budgeting twice as effective…” at the bottom of each of these pages.

With traditional software, you would show your checking account and its balance, maybe a savings account or two, and their balances, etc. The end-all benefit was that you could then reconcile what you showed in your program to what the bank actually had. Times have changed.

Why Balancing Your Checkbook may be a Royal Waste of TimeWith the advent of the debit card, the ever-declining use of checks, and online banking, the idea of having to “balance a checkbook” is becoming obsolete. Julie and I, in our marriage of several years, have never balanced our checkbook. We write a check for rent and a check for tithing each month and that’s it. Everything else is electronic and practically instantaneous.

The fact that checkbook balancing is obsolete will become clearer as the impact that the Rules have on your finances are fully realized.

Traditional Checkbook BalancingWhen balancing a checkbook, you would record checks or debit card purchases right when the transaction took place. When your bank statement came, you could then manually reconcile what the bank said you had done, with you actually had done (provided you had been accurate). You would then make sure to deduct any checks in transit from the bank’s balance to make sure everything matched up. You would inevitably end up chasing some discrepancy.

Now I don’t even get a paper statement in the mail. I can login to my bank account any time, day or night, and see what has cleared and what hasn’t. This monthly process of reconciliation is an unnecessary and time-consuming task that can be eliminated if you wish.

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How the Rules Ensure Your (Overdraft) ProtectionThe need to balance a checkbook has a lot to do with the size of cushion with which you choose to operate. If you’re barely making ends meet, or timing checks to make your money seem to stretch further, you’re probably reconciling your checkbook to your bank on a daily basis--you have to.

But if you have a fairly large, (it’s all relative, of course,) cushion in your checking account, the need to balance your checkbook frequently declines greatly, even becoming unnecessary.

Under the Rules of YNAB, you’ll be operating with a cushion:

1 As soon as you have made it one month without touching any paychecks, you’ll be living under Rule One. Rule one allows approximately a month’s worth of income as cushion in your checking account nearly all the time.

2 Let’s not forget that you’re also living under Rule Three. You will have categories that build up fairly sizeable balances over time. Toward the end of the year, your Christmas category may have accrued a hefty chunk of change. Every six months, your car insurance premium would show a large balance. If you’ve been diligent in stowing away money for inestimable expenses, and you’ve been blessed with minimal repairs, your car repair category will be healthy as well. These balances protect you from overdrafts and become part of the cushion.

Consider for a moment what it would take to overdraft your account. You would need to spend all of last month’s income and all of whatever income you’d made this month and all of your rainy day categories’ balances before you’d overdraft. At that very moment, lightning would probably strike as well.

My whole objective in belaboring this point is not to tell you that you should stop balancing your checkbook. It’s simply there to tell you, “Hey, things are going to be a little different now. That process you’ve been going through may not add as much value as it used to. You can consider dropping it.”

If I Don’t Need to Balance a Checkbook, What Do I Need to Do?You should focus on ensuring that every transaction the bank shows is also entered into YNAB. People do this a myriad of ways; our process is relatively simple. We save receipts if they covered multiple categories (such as receipts from Target, Kroger, or Wal-Mart). Every few days we sit down and enter those receipts. We also check our bank account online and record any other transactions listed there in YNAB.

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I can usually quickly tell when we last did this little process because those transactions online at the bank will be accounted for in YNAB.

The only reconciliation you need to do is to make sure that those entries showing at the bank are entered into YNAB (importation of your bank file is a very nice way of doing this). If you pay for something with cash, make sure you keep a receipt! Also, I don’t think it’s bad money management to wait to record something in YNAB until it’s posted to your bank account. Why? Because you’re going to be caring more about how much money you have in your categories than you will about what the overall total at your bank is.

As you grow more comfortable with the idea that YNAB manages your cash flow, you’ll also end up saying to yourself, “If I take care of the cash flow, the balances take care of themselves.” In saying this, I’m not implying that you don’t check to make sure the bank hasn’t made any mistakes. However, your first criteria for deliberation over whether you should buy item A should not be the balance in your bank account. It should be the balance for item A’s category.

FAQ: GeneralFor questions specific to the use of YNAB in Excel, you should go to their respective sections here.

Is it counterproductive to go back and adjust budgeted amounts?There are two camps on this - one camp says absolutely do not adjust it because you have to see what you expected to happen versus what actually did happen. The other camp says adjust it.

I'm in the second camp myself - though it's a personal preference. I like the idea of allocating money more than budgeting. Budgeting to me sounds like you're arbitrarily assigning limits to yourself based on some number you think up at the beginning of the month. But when I think of assigning or allocating money to spending categories I see it like I'm handling a limited (unfortunately!) amount of resources. If some resources aren't being consumed in Category A, perhaps Category B could use them.

That being said, I don't adjust the budget too often unless I need some excess money in a struggling category.

How do you handle Flexible Spending Accounts in YNAB?Short method: Don’t record an inflow for the money that was deducted from your paycheck – simply record your paycheck inflow net of the FSA deduction. If your paycheck is normally $2,000 but you have an FSA deduction of $50, you would record an inflow of $1,950 ($2,000 - $50).

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When a reimbursable event happens, record the purchase as you would any normal outflow. When you are actually reimbursed, record an inflow for the reimbursement to the category that had the original outflow.

The end result of this is that you show no net effect of any purchases that were FSA-related in your budget for the year. Some would like to see their budget hold a bit more information, so they choose the…

Long method: At the beginning of the year, record a supplemental inflow of the total amount you are pledging. Let’s say it’s $1,000. Your available amount for that month will increase by $1,000. Budget that $1,000 into a newly-created category called “Flex Spending Account” (or something similar).

When a reimbursable event takes place, record the outflow as you normally would. Once you receive the reimbursement, record a negative budget amount in your “Flex Spending Account” category. This will pull the money out of that category and into your overall Available balance. Now budget that reimbursement into the category that had the original outflow.

One advantage of this method is that you can track your FSA balance inside the budget. Also, your outflows and reimbursements are netted against each other, so the budget will be able to show you how much you really spent on reimbursable expenses. The disadvantage to the long method is that it’s a wee bit longer.

I'm paid on the last day of the month. Do I already have a buffer?Ha! While it's true that you are "technically" living on last month's paycheck (Rule One), you are certainly not operating with a buffer in place. What you earn on the 31st of March, you may very well need to spend on April 1st. That's no buffer!

If I were paid on the last day of each month, I would pretend that the paycheck arrived on the first of the following month. From that standpoint I would now build out a buffer. In this instance, you'd want to make sure you lived until the following paycheck without touching the one you had just received.

Wouldn't the buffer be put to better use paying off credit cards?NO! While I talk about the huge advantages in paying down credit card debt as fast as you can, I need to back up a bit and be pretty clear here.

It's true that while you're saving one month's expenses you should be going full-bore in that direction - every single penny needs to be saved so you can start a month with one month's expenses. It's crucial. To that end I do say you should pay just the minimums on your credit cards at this time.

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Mathematically, that doesn't make sense. As I mention in the article referenced above, if you pay down debt, it's as if you're making a return on your money equal to the interest rate. 18% is tough to find these days! But we're not just talking about math here when we're evaluating your financial choice. As a matter of fact, very little of it has to do with math.

You are taking steps that will enable you to no longer live paycheck to paycheck. That little change in your financial life will be paying far greater returns than you can get anywhere, ever. You'll have greater peace of mind and less stress - both of which lead to an improved environment for making financial decisions. Better financial decisions will be what pays you these dividends ultimately.

I know it's tempting to knock down that debt, but please, get out of the paycheck to paycheck cycle first - then attack that debt with absolute unheard of full-bore intensity. It'll be gone in no time.

What do I do with the occasional third paycheck?You handle it exactly as you did the other paychecks. You would enter an Inflow of type 'Primary'. That third paycheck would then be available to budget the next month (following Rule One). Basically you just got a bit of a windfall. Use it to pay down debt, invest, build your buffer or emergency fund, (or save for a cruise).

How can I check what I should have in the bank?At the very top of the Budget section (for either YNAB, or YNAB Pro) you’ll see a Grand Total for Budgeted, Spent, and Balance amounts. The Balance Grand Total is basically how much YNAB says you could spend right now.

You’ll want to adjust that number for any money in the Budget that is saved in different locations (such as at ING or in a money market account), and also for paychecks already received that are deferred to next month (per Rule One).

What can you suggest for those of us that work on commission?Rule One will be your best friend. Focus on building your buffer as fast as you can. You’ll find everything about managing your money becomes easier.

Can I use cash envelopes with YNAB?My wife and I have used cash for groceries in the past very successfully (except when we would forget to bring the envelope with us). I don't see any problem in you being able to use cash for all of your spending categories (at least the ones that make sense).

When you physically place the money into your envelopes, you’ll just need to virtually budget the money in YNAB. When money is spent from the envelope, you can record it in YNAB (or heck, just record it in YNAB once all the money is gone and save yourself some entries).

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Where do you physically keep rainy day funds?What my wife and I have personally chosen to do is to put all rainy day funds that are paid annually in separate ING Accounts (which can all be managed from the same account, they're more like sub-accounts). Everything else we just keep in the checking account. I'm not a big fan of transferring money in and out every three months just for a few dollars in interest - but that's me. You'll need to decide for yourself where you'd like to physically keep the money (and be cognizant of it when evaluating your finances).

How do I record cash taken from my bank account?The short answer is that you don't record anything at all. In fact, whether you're using cash, a credit card, debit card, ACH, or EFT, you only record an outflow in YNAB when you actually spend the money.

However, for some people it’s easier just to have a Cash category. When money is withdrawn, you would record the outflow right then and be done with it. This is easier to manage overall, but you lose some knowledge about where your cash is actually spent.

ConclusionMy hope is that I’ve been thorough enough that you feel confident in your ability to use YNAB. I hope you really believe that it will help organize your finances and give you financial freedom and flexibility. If you are disciplined and scrupulous about following the Rules and careful to accurately record your cashflows, I know this software will help you achieve your financial goals.

The following pages will explain both YNAB and YNAB Pro. Obviously you need only pay attention to the one you purchased. The information up to this point has been universal, applying to the system as a whole.

If you purchased YNAB in spreadsheet form, you’re in the right place. If you purchased YNAB Pro, none of this applies to you, so I’d suggest you head here.

YNAB

General InformationAll instructions will apply to both Microsoft Excel and OpenOffice, unless I specify otherwise.

You must have MS Excel (Mac or Windows), or OpenOffice (Mac or Windows) installed on your computer for YNAB to function properly.

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Changing FormattingYou can change row height, column width, background color, font family, font size, etc. because the sheets are protected without a password. I protect them initially only so you’ll know which cells you can alter, and which contain crucial formulas. To unprotect a sheet in MS Excel, make sure that sheet is active, then select Tools Protection Unprotect Sheet… In OpenOffice, select Tools Protect Document Sheet…

Once you unprotect a sheet, it is possible that you could delete a crucial formula. Proceed very, very carefully if you choose to use the sheets unprotected.

The RegisterAs you can see from the screenshot to the right, when you experience an inflow, you simply input the Date, Category (Primary, Supplemental, or Transfer), a Payee, Description, and the Amount (in the “In” column). Those inflows will be picked up by the system and land on the Budget sheet, which we’ll look at in a second.

If you want to see, for example, only Primary inflows, you could simply select the down-arrow (circled in red above) and select “Primary”. When a down-arrow is blue it tells you it is currently filtering out all other transactions.

This can be pretty handy if you want to take a quick glance at something.

You can use any categories you wish, just make sure to add them to the Budget sheet first if the category has never been used before.

The BudgetThis is where the action happens. This is where you become maestro of the music.

First, you notice the Categories listed on the far left. You have space for about 60. Any category you choose to use on the Register sheet must be included here on this sheet first. That’s how you add a category; if you want to use it on the Register sheet, type it in the Categories column here.

You cannot copy and paste rows and move things around like you think you can here. There’s a LOT going on behind the scenes and if you delete or add any rows, you’ll inevitably break something.

You never enter anything in the Spent column of the Budget sheet – it’s done for you, transferred from the Register.

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OverviewThe Overview sheet is there for bragging rights and other conveniences. I can brag – for instance – that I know exactly how much my wife and I have spent on groceries since we married. It’s the nerdiest thing you’ve ever heard…and yet you’re jealous…

The only cell you actually need to do anything with is the Budget Year. It’ll be red until you fill it in. When you start a budget for the next year, make sure to change the Budget Year to the correct year.

CategoriesThe Categories table gives you a breakdown of the following:

• Percentage of expenses spent on that category.

• The amount you’ve spent so far this year.

• The total you’ve spent since beginning the YNAB system (if you choose to roll it forward year to year).

• The average amount you spend per month.

Income StatementThe Income Statement is pretty self-explanatory. You take all of your inflows (Primary and Supplemental), less your total outflows, and you get your net cash flow for the year (so far). Make sure that number stays in the black. This will show you your increase in net worth (less capital gains and interest) for the year.

BudgetThe Budgeting table is also pretty straight-forward. For each month you see how many categories overdrafted, what the dollar amount of the total overdrafts were, and what percentage of the money you budgeted was misspent. Keep that percentage down (but face the music that it’s going to happen).

Using YNAB for the Following YearI’m an optimist. That means

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that I believe you are going to keep using YNAB (and tell all your friends, who will subsequently tell all their friends…) year after year after year.

Moving from December to January can be done in a few steps:

1. Save YNAB under another name, like “YNAB-20XX”.

2. Unprotect the Overview sheet if it’s protected.3. Right-click on the Column F Header, select Insert. 4. Select the cells in the old column from the year all

the way down to the last category. 5. Copy (Ctrl-C) those cells. 6. Paste the formatting and the values into your new column: Go to Edit

Paste Special, select Values. Go to Edit Paste Special, select Formats. Make sure you put the correct year atop each column.

7. Clear the Register sheet. Also delete the amounts you had budgeted from the prior year on the Budget sheet.

8. On the Overview sheet, enter December’s income, and December’s overdrafts (you can get that information from last year’s budget).

9. Sum the positive balances of December’s categories (these are your ending balances) and record a supplemental inflow in the new budget.

10.Budget the newly-available money into the categories where it is needed (some choose to carry over their balances exactly, others choose to rework them slightly).

There, you’re all set with a new version of YNAB. Happy New Year!

Note: in YNAB Pro, it rolls forward from year to year automatically.

FAQ: YNAB

How can I keep track of notes to myself in YNAB?I personally prefer the comment tool. Go to the cell you'd like to comment on (perhaps remind yourself about a bill that's coming up next month), right-click and choose "Insert Comment". You can have

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Tip:If you don’t see column headers, go to:Tools Options View, and check the “Row & Column Headers” box.

In OpenOffice, go to:Tools Options Spreadsheet View, and check the “Column/Row Headers” box)

Adding a new category:To add a new category, simply type it into the Categories column on the Budget sheet. Then you can use that category on the Outflow sheet right away.

the comment show all the time, or only when you move your mouse over the cell. There will be a little red triangle in the top-right corner of the cell if it contains a comment.

How do I get rid of the yellow text boxes?To be rid of those no-longer-helpful textboxes, make sure the sheet is unprotected (Tools --> Protection --> Unprotect Sheet; if you're in OpenOffice I think it's Tools --> Protection --> Sheet). Once it's unprotected, click on the edge of the textbox and you'll see a border around the textbox appear. Simply hit the 'Delete' button and it's gone. (Make sure to re-protect the sheet when you’re finished).

Can I add other sheets to YNAB?Yes. Do whatever you need to do to help you use YNAB. Just please don't re-distribute it in any way, shape, or form.

Why have some of the Register lines disappeared?This is probably because you have the Registered filtered. You’ll know this because one or more of the top-most drop-down arrows on the Register will be blue instead of black. To clear filtering, select the blue arrow(s) and choose “(All)”.

I’m seeing “#####” instead of the value in cell. Why?Those annoying ### signs mean the column width isn't big enough to fit the value in the cell. Hopefully you'll get these in the inflow column more than the outflow column (a little YNAB humor - I keep to myself at parties).

To fix this you'll need to widen the columns. First you'll want to unprotect the sheet. Go to Tools --> Protection --> Unprotect Sheet (it's a bit different for OpenOffice). There's no password, so it'll be unlocked. Now, if you don't see column headers across the top, you'll want to see those. Go to Tools --> Options and check the box 'Row & Column Headers'. Click 'OK'.

Now, find the column that's the culprit, and move the cursor to the very right edge of that column's header (a letter at the top) and your cursor will change to an I-Bar. Double-click and the column will widen enough to fit in that larger value.

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